Economic analysis of group incentive schemes begins with the free-rider problem: The individual member of the group bears fully the personal costs of her efforts but shares the gains from those efforts, in terms of improved performance and hence increased compensation, with members of the group. If she behaves selfishly and trades off only her own benefit against the personal cost of her efforts, she will underperform, relying instead on the efforts of her colleagues. The employer can control this by increasing the extent to which the group reward responds to measures of group performance, but this generally increases the risks to employees, who must then be compensated for bearing this risk. The larger the group, the more severe the problem becomes.

Four somewhat intertwined factors ameliorate this grim picture:

1 – At least for small groups, it is natural to assume that group members can monitor each other\’s actions more cheaply and efficiently than the employer can. This may be true, for instance, on technological grounds, because of proximity to other members of the group. This by itself is of no consequence.

2 – The interaction among group members is repeated and rewards are provided to members of the group that depend on the group\’s performance. The members of the group may enter into a cooperative scheme of working harder for the common good, under the threat that all will go back to acting selfishly if some slack off. Of course, the ability of group members to monitor one another is key to this type of cooperative scheme, which is the link back to point.

3 – Reinforcing this is the possibility of social sanctions, imposed by members of the group on any members who do not work hard for the common good. Members in workgroups share time together, time that often extends to off-the-job social activities, and they are usually better able to enforce meaningful social sanctions on each other than can the employer. Once again, it is the combination of this factor with the first that ameliorates free-riding: Members of the group have the ability to tell who among them is slacking off, and then-through the threatened breakdown of future cooperation or through the immediate imposition of social sanctions-they can effectively discipline slackers.

4 – In addition, whether through natural bonds of kinship or through the psychological process of escalating commitment, members of a workgroup are likely over time to internalize each others\’ welfare, irrespective of any threats of future non-cooperation or social sanction. To the extent that this occurs, even without the ability of group members to monitor each other, we will see effort levels by members of the group that come closer to balancing the privately borne costs of effort with the group wide benefits that accrue from increased effort.

These four factors, taken together, can be very powerful. Indeed, even if an employer has available good measures of individual performance, it may be worthwhile to resort to group incentive schemes, just to take advantage of the relatively greater ability that groups have for internal monitoring, as long as peer pressure can be relied upon to conquer the free-rider problem.

This analysis suggests that the longevity, size, and composition of the group all matter. For longevity, the argument is short and sweet:

– Longevity is the sort of collusive, cooperative equilibrium suggested in longevity of membership is likely to heighten the impact of social sanctions pointed to in and the welfare of others often arises because of escalating commitment.

The direct effect of group size is pretty clear: As groups get larger, they generally lose the ability to engage in meaningful internal monitoring, they are apt to find it harder to reach a cooperative equilibrium, social sanctions will be harder to enforce, and welfare of the group is less likely to occur.

Group size matters in another way, on economic grounds. Although it is not a law of nature, it is typical that as the group gets larger, measures of performance for the group incorporate more and more extraneous-to-effort uncertainty. Work teams are measured according to their output and costs, divisions according to divisional profits, and entire firms according to their bottom lines; yet as the group gets larger, its performance reflects the impact of completely extraneous factors, such as the state of the economy or the entry of a foreign competitor. It is also the case that meaningful relative performance measures are generally harder to devise the larger is the group, because there are fewer other groups that share a similar environment. Thus, on grounds of efficiency in risk sharing, group-based incentives for larger groups tend to be less efficacious.

The economic arguments against rewards based on large-group performance take no account of the symbolic content of such reward systems, which can powerfully affect the extent to which the individual internalize the welfare of the entire organization. Where such symbols can activate powerful processes – which depends on the workforce, organizational culture, and to some extent on the external social and economic environments – and where internal is particularly valuable on strategic and technological grounds, the economic arguments against basing rewards on firm – level performance are generally outweighed by the non-economic effects of this sort of pay for performance.

http://www.arturvictoria.info/
http://sites.google.com/site/cliptheschoolbeginning/
http://sites.google.com/site/arturvictoriasite
http://adesg-europa.blogspot.com/

http://www.arturvictoria.info/
http://sites.google.com/site/cliptheschoolbeginning/
http://sites.google.com/site/arturvictoriasite
http://adesg-europa.blogspot.com/

Author Bio: http://www.arturvictoria.info/
http://sites.google.com/site/cliptheschoolbeginning/
http://sites.google.com/site/arturvictoriasite
http://adesg-europa.blogspot.com/

Category: Business Management
Keywords: Organization, behavior, human, information, career, responsible, planning, human resources, leader,